Monday, August 12, 2013

The Sharing Economy

The venerable and erudite Financial Times of London wrote a opinion piece entitled, "the new model sharing economy" in today's paper.  I am a big believer in this movement, and wish to share a few historical observations on its development.

We probably should begin with a quick definition.  As James Gardner wrote for Forbes, "The Sharing Economy (sounds) like the spiritual home of new age digital hippies, or maybe a step up from a barter system."  This is the risk for those businesses and consumers driving this movement.  It can been seen as "hip or trendy" but the true motivations are more profound and sustainable.  Let me explain.

First, the sharing economy is a pure capitalistic and self-interested endeavor.  The "feel good" element of the shared and sharing economy is that we are "sharing." It seems like we are doing something for others rather than doing for ourselves.  It seems anti-materialistic, and anti-individual.  It seems more communal.  All these things are partially true, but they are bi-product benefits, not primary motivators.  The key to understanding what is driving the sharing economy is to review the economic principle of under-utilized assets; or said differently under-utilized capacity.  There is an economic opportunity to monetize under-utilized assets which individuals, households and companies recognize, and technology is allowing them to be presented for sale and rent.  It is the development of the ability to rent these various assets which has led to the use of the term "Sharing."

But let's review the manner in which selling under-utilized assets has evolved.  I remember when I first learned about eBay.  I was fascinated by the simple idea -- you can now have a permanent and persistent garage sale.  I LOVED the re-cycling of family assets:  clothing, electronics, toys, video games, CDs, DVDs.  This was the first step -- technology allowing the efficient use of society's resources.  Individuals who have assets which have ended their useful life for THEM, could now be offered for sale to people who may find the items useful AGAIN.  While eBay lost its way for awhile trying to compete with Amazon, it seems to have returned to its roots.  It again is helping to re-circulate assets (new and used) and therefore providing greater utility and productivity for the original investments in those assets.  By unleashing cash back into an individual, household or company, eBay allows for future investment and consumption by these same economic entities.  Brilliant!

The other two leaders in this space are Craigslist and Amazon.  Craigslist is indeed the "classified advertisements" from newspapers -- selling all things and services -- with no transaction fee.  It handles the hyper-local market by allowing large items to be posted (items which would be too onerous to ship for households).  Amazon has evolved from book selling to used book selling to now allowing the sale of almost any used merchandise.  They charge a lot of money compared to eBay, but have improved by allow the listings to be permanent rather than time-bound (which is a failing of both eBay and Craigslist, more than likely because of server operating costs).

Second key principle of the sharing economy -- every member of a rational market evaluates how to use their monetary resources.  Every person, household and company chooses whether to rent or own.  This is where new technology moves us from offering under-utilized assets for sale, to allowing them to be shared or rented.  The logical way to begin is with the most valuable and lasting assets -- real estate.  This is why AirBnB makes so much sense.  People can use technology to list their open rooms or houses for anyone to rent.  They are monetizing under-utilized assets by renting them, not selling them.  The next was an evolution of the traditional vehicle rental model through ride-sharing.  The leader in this area is vRide, for whom I have the pleasure of serving.  Vanpooling is a natural way to efficiently share rides to work.  Carpooling is already used by over 20 million U.S. citizens.  More and more software, including vRide's, is making it easier to carpool.  Look for vRide technology to make this a cashless community of drivers and riders in the very near future.

As the FT correctly said, consumers "rely on trust and on supporting institutions for their success."  This is the combination of technology, legislation and regulation.  I hope it can all keep up because the consumer likes this, a lot.

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